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Written by: Aiying Aiying & BIS

 

The Basel Committee on Banking Supervision (BCBS) issued the "Risk Disclosure Framework and Capital Standards for Banks' Crypto Assets", which will be implemented on January 1, 2025. This report details the rules and requirements that banks need to follow when handling and holding crypto assets. Aiying Ai Ying has studied the contents of the report in detail and sorted out 6 important contents to help industry practitioners understand this new regulation. We will explain how these new regulations affect the virtual currency industry, especially the management and use of stablecoins and other crypto assets.

 

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1. What is the Basel Committee on Banking Supervision (BCBS)?

 

The Basel Committee on Banking Supervision (BCBS) is an international organization composed of central banks and banking regulators from around the world. Their goal is to enhance the stability and consistency of the global banking system and ensure that banks can operate safely and soundly around the world. The main task of BCBS is to develop standards and rules for the global banking industry. These standards help regulators in various countries ensure the safety and reliability of the banking system. In addition, BCBS also promotes information exchange and cooperation between regulators in various countries, helping them share best practices and respond to various challenges facing the banking industry. In short, BCBS is like an international "rule maker" for the banking industry, providing guidelines for the global banking industry to ensure the stability and security of banking systems in various countries.

 

2. Why should we pay attention to the "Prudent Treatment Standard for Crypto-Asset Exposure" issued by BCBS?

 

1. Influence

 

Although BCBS standards are not laws, their recommendations are often adopted and implemented by central banks and regulators around the world, so they have a significant impact on banks around the world.

 

2. Industry relevance

 

Banks play an important role in the virtual currency industry. The BCBS standards will directly affect how banks treat and handle crypto assets. This means that if you work in the virtual currency industry, you need to understand these standards because banks will use these rules to decide whether and how to deal with crypto assets.

 

3. Long-term impact

 

The purpose of these standards is to protect the stability of the financial system. Over time, the virtual currency industry will also need to become more compliant and transparent to comply with these new regulations. Therefore, understanding and complying with these standards is very important for the long-term health of the industry.

 

In short, although the BCBS standards are not laws, they will be widely adopted and affect the way the banking and virtual currency industries operate. Therefore, practitioners in the virtual currency industry need to pay attention to these standards to ensure that their businesses are compliant and remain competitive.

 

3. Classification of Crypto Assets

 

BCBS divides crypto assets into two categories: Group I and Group II.

 

 

The first group of crypto assets (Group 1)

 

  • Group 1a: These are digital versions of traditional assets, such as digitized stocks and bonds.

  • Group 1b: These are crypto assets with stabilization mechanisms, such as stablecoins, whose value is pegged to a traditional asset (such as the US dollar) and can remain stable.

     

Group 2

 

  • Group 2a: These crypto assets do not fully meet all the conditions of BCBS, but there are some measures to hedge risks, so they are relatively safe.

  • Group 2b: These crypto assets do not meet the BCBS conditions at all. Most of them are unbacked cryptocurrencies and are more risky.

     

Simply put, the first group of crypto assets are either digital versions of traditional assets or cryptocurrencies with stablecoin mechanisms; while the second group are those cryptocurrencies that do not fully meet the standards, especially those that do not have any guarantees.

 

IV. Major changes and requirements of the new regulations

 

1. Infrastructure risk add-on

 

Regulators could add additional risk requirements based on weaknesses in crypto asset infrastructure, meaning that if a crypto asset platform has problems, banks may need to hold more capital to cover those risks.

 

2. Redemption risk test

 

This test is to ensure that stablecoins can still be redeemed under market pressure. Simply put, even in extreme cases, stablecoins must be able to deliver on their promises and allow holders to exchange them for equivalent traditional currencies.

 

3. Regulatory requirements

 

Stablecoin issuers need to be subject to strict supervision. This includes ensuring that there are sufficient reserve assets to support the value of the stablecoin and disclosing this information regularly to ensure transparency and reliability.

 

4. Group 2 exposure restrictions

 

The total amount of the second group of crypto assets (the high-risk ones) held by banks cannot exceed 2% of their Tier 1 capital. This means that banks must be very cautious when investing in high-risk crypto assets and cannot hold too much to prevent excessive risk.

 

In simple terms, the new regulations mainly make changes and requirements in the following aspects: increasing risk assessment of infrastructure, ensuring the redemption ability of stablecoins under pressure, strengthening supervision of stablecoin issuers, and limiting the amount of high-risk crypto assets held by banks.

 

5. Impact of the New Regulations on the Virtual Currency Industry

 

1. Impact on Stablecoins

 

  • Ensure the quality and transparency of reserve assets: Stablecoin issuers must ensure that their reserve assets are of high quality and disclose information about these assets on a regular basis. This is like letting everyone know how much real money is in their "purses".

  • Strengthen supervision and compliance requirements: Regulators will conduct strict scrutiny on stablecoin issuers to ensure that they comply with all regulations. This will make stablecoins more reliable and reduce investors' concerns.

 

2. Impact on other crypto assets

 

  • Higher capital requirements: Crypto assets that fail to meet the classification criteria (higher risk) will require banks to prepare more funds to deal with potential risks. In short, these high-risk assets have become more expensive because banks need more money to "cover the bottom."

  • Managing portfolios: Banks need to be more cautious when holding crypto assets to ensure that they do not exceed exposure limits. This means that banks will more strictly select and manage their crypto asset investments to avoid excessive risks.

Simply put, the new regulations impose stricter requirements on stablecoins and other crypto assets, aiming to increase market transparency and reliability while making banks more cautious when investing in high-risk crypto assets.

 

6. Aiying’s suggestions (industry response strategies)

 

1. Strengthen compliance management

 

Virtual currency companies need to establish and improve their own compliance and risk management systems. Simply put, they need to formulate a complete set of rules and processes to ensure that all their operations comply with legal and regulatory requirements to avoid pitfalls.

 

2. Improve transparency

 

Companies need to disclose their reserve assets regularly and accept independent audits, just like showing their "family assets" to the public regularly to let everyone know how much assets they have and ensure everyone's trust.

 

3. Collaboration with regulators

 

Actively communicate with regulators to ensure compliance with new regulations. This means that companies should proactively engage with regulators, understand their requirements, and adjust their businesses based on these requirements to ensure compliance.

 

Simply put, virtual currency companies need to strengthen internal management, improve information transparency, and maintain good communication with regulators in order to better adapt to the new regulations and ensure the smooth development of their business.

 

Reference document (Prudential treatment of cryptoasset exposures): https://www.bis.org/bcbs/publ/d545.pdf